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Scor is still a long, long call

As expected, CIAM, an active investor, has renewed pressure on Scor via a new letter published last Friday. The activist fund criticised the remuneration policy of the reinsurer and said it would vote against both the CEO’s remuneration report as well as the remuneration policy for 2020. It asked the company to disclose further information on the succession plans of Denis Kessler, whose departure is scheduled for 2021. CIAM requests the appointment of an independent Chairman after Scor’s decision to segregate the Chairman/CEO roles in two years.

The fund has urged Scor to postpone its Annual General Meeting confirmed for 17 April, albeit online. This decision will “significantly reduce the time available for shareholders to review the material published or to engage with the company in these testing times”. CIAM referred to the “poor share price performance that pre-dated the COVID-19 crisis”. The pressure put on by the fund paid off as, on 30/03, the reinsurer eventually decided to give shareholders’ democracy its chance by pushing back its shareholders’ meeting, while making clear that this was “at the request of the Chairman and CEO”. The hard fact is that Scor did not manage to fly in formation with the top-notch reinsurers when times were good and collapsed as quickly as peers when the COVID-19 disaster struck (see chart). That leaves us with a 40% upside potential vs. 13% for the sector.

Covéa etched into memories

CIAM chose the right moment to address its message. Shareholders must still be furious after the rejection of the Covéa takeover offer back in 2019. The proposition of the mutualist company valued Scor at €8.2bn, while the market cap of the reinsurer is today at only €3.8bn. The announcement of the signature of a Memorandum of Understanding between Covéa and PartnerRe for $9bn was immediately reflected in Scor’s share price: Scor would not merge with PartnerRe and would not have a suitor.

Shareholders would then punish management by voting against its compensation. Last year, 45.5% opposed the remuneration of the CEO. Denis Kessler received €2,460m in 2019, despite a lower variable compensation. The Board of Directors has decided to make the calculation of the annual variable compensation relating to the financial objective more challenging, changes qualified as “cosmetic” by CIAM.

If the Scor management has structured its 2019’s defence on the idea that Covéa is not the suitable partner, the current transaction with Exor shows that the French mutual insurer’s offer was dead serious (even though we are very dubious about the ability of Covea to fund this deal without going to the bank and putting at risk its mutual balance sheet; it is not clear whether this deal will survive COVID-19 anyway). Requesting details about the new CEO is important for CIAM, which is looking for the nomination of a more flexible management, less obsessed by keeping the reinsurer independent.

Solid defence

Scor is still unable to reach its 2016 net profit (a CAGR of -11.2% on 2016-19) despite growing sales (a CAGR of 5.7%). However, Denis Kessler has solid arguments in his favour.

The reinsurer confirmed its dividend (€1.8/share) to shareholders in a tough liquidity context. The capital position is resilient as shown by a solvency ratio at 226%. The COVID-19 crisis and the volatility of the financial markets are far from being problematic. A 25% drop in equity returns would lead to a 4% reduction in the coverage ratio according to solvency sensitivities. Thanks to this solidity, the company would be able to keep an upward trend in its dividend for the next years. We also exclude the hypothesis that the decision to postpone the AGM was driven by the announcement of the French government to not support companies that distribute dividends.

Scor has a clean business. It has strengthened its risk coverage and the retrocession ratio moved from 9.7% in 2018 to 11.6% in 2019. The Life segment was particularly concerned and ceded premiums have doubled to €324m in the Q4 19. This is good news regarding the current context and the uncertainties relative to the consequences of the virus outbreak.

The capacity of Scor to absorb high claims improved significantly. Despite a FY 19 nat cat ratio at 11.6% (vs. 7% predicted), the combined ratio was controlled at 99%. In the January 2020 renewals, the reinsurer limited its exposure to social inflation (worker compensation, commercial auto and medical malpractice) which represents only 1.5% of its reserves, while building a US casualty portfolio (c. 12% of reserves and 11% of GWP). In addition, the portfolio is largely proportional and so benefits directly from primary market price increases.

Positive impact on prices

The influence of the COVID-19 outbreak on the reinsurance pricing would be positive. We believe the effect will be observed from the upcoming renewals season even if, historically, prices did not move due to a same year event. This time, the difference will come from the drop in financial markets that will weaken the asset side of the balance sheet of operators. Reinsurers, which enjoyed abundant capacity by the end of 2019, will see their flexibility regarding their capital management reduced. Scor, like its peers, will integrate all potential losses in its rates immediately. The consequence is a slight improvement in written premiums. We do not expect a significant increase in volumes owing to the disciplined underwriting strategy of the French company (and that of its European peers).

A significant negative impact is estimated for investment income and operating earnings: -21% to €522m and -20.5% to €453m in FY 20, respectively. Net profit would not revert to FY 19’s level before 2022. Despite this scenario, the capital position would still be resilient at 200%.

Scor’s earnings components 2006-22

Valuation that gives ideas

Ytd, Scor has suffered most amongst listed reinsurers, dropping by 45.4% vs. -31.8% for the sector. As we said, this negative trend is not only the result of fears from COVID-19, but also of the disappointment of investors after the Covéa-ParnerRe deal (again, if that deal ever gets through market convulsions) Today, Scor is a reinsurer with a P/Book at 0.6x (vs. 0.86x for the sector) and offering a dividend yield > 9%, which is rather uncommon for the industry. Scor remains a natural target for industry consolidation. The current crisis may accelerate such a movement. CIAM has presumably the same expectation now that it sits on a steep loss.

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